PORTUGAL – NOT THE MOST OBVIOUS CHOICE TO MOVE ONE’S TAX RESIDENCE
The article about taxes in Tenerife generated great interest. Many Poles consider moving and naturally the warmer regions of Europe are looked at first. We have to balance out what our hearts and our minds want 😉 because good weather doesn’t always go hand in hand with a favourable political, economic and tax climate. This article will bring you closer to Portugal, the somewhat forgotten but still very attractive country where what at first glance looks unfavourable turns out to be possible.
Portugal is a binary hate it or love it kind of place. It looks warm and even hot, but winters are wet and windy. Apartments are often unheated and one has to contend with damp conditions. Bear that in mind when buying or renting a house. Life is slow and for those who like places where the world seems to have stopped in its tracks and revel in peace and quiet, and experience nature, this is the ideal place. Or maybe it’s a good location for a second home? The people of Portugal can be an hour or a day late, which is quite normal for them. As long as you are on holiday and your only aim is to relax then it makes for a pretty funny anecdote. It may be less funny if you decide to live here or try to take care of business in Portugal.
Because there is a shortage of jobs in Portugal and the cost of employment is not particularly high Portugal welcomes entrepreneurs. The cost of living is reasonable, which also attracts those highly qualified foreigners, who also value the peace and slow life that’s on display in Portugal. Purchasing a car locally is one of the most important expenses that should be incurred. It is not worth importing a car from another country, it is likely to be too expensive and quite possibly unprofitable (depending on the class of car).
If we only look at the general rates of income tax whether of natural persons or corporate entities, taxes in Portugal seem much higher than in Poland. However, it is possible to enjoy the charms of Portugal without having to pay higher taxes by using some of the tax instruments available here.
NHR Status – NON-HABITUAL RESIDENT
One way to taste life in Portugal is for an individual to obtain the status of NON-HABITUAL RESIDENT. That type of taxation is provided for those who have acquired tax residence in Portugal without being a Portuguese tax resident in the last five tax years and who have applied to be taxed under that specific tax regime. Taxation under these rules can be obtained for a maximum period of ten years and that amount of time should be sufficient to understand if the Portuguese lifestyle suits.
So how to become a tax resident in Portugal? You must have stayed in Portugal for more than 183 days in a 12 months’ period by the start or end of a tax year. If that condition is not fulfilled, it is necessary to have a place to live within the territory of Portugal, but it must be used in such a way as to suggest the intention to maintain it and use it as a permanent residence.
Notwithstanding the above, it is worth bearing in mind that upon obtaining Portuguese tax residence one loses their existing residence. These are two independent processes and poor implementation of either can result in double tax residency.
Benefits of NHR status in Portugal
Firstly, if an individual earns taxable income in Portugal, they are subject to a flat rate of 20% (as opposed to the sliding scale of 14 to 48% for Portuguese tax residents). This rate applies to income from employment, self-employment and professional scientific endeavours, artistic or technical activities with high added value (theatre artists, cinema artists, musicians, engineers, doctors, lawyers, scientists, but also programmers or senior managers).
Secondly, income from abroad taxed at source is exempt from taxation within the Portuguese territory (e.g. income from real estate, dividends, income from work outside Portugal, economic and professional activities with high added value carried out outside Portugal). In the event these types of incomes have not been taxed at source, they are taxed at the rate applicable to tax residents in Portugal, i.e. 28% on passive income (real estate, capital gains) with all other income taxed through a sliding scale. Income from an overseas pension is taxed in Portugal at a rate of 10%. In addition, there is no wealth tax for NHRs, and the transfer of funds in Portugal or abroad is free of charge.
Madeira International Business Centre – business-friendly
For those who want to invest in business in the Mediterranean, the offer of Madeira International Business Centre (MIBC) coupled with the local tax incentives can be an interesting combination. It provides a CIT rate reduced to 5% until 2027. Additionally, the payment of dividends or interest from such companies is not taxed at source. Companies are also partially exempt from civil law taxes. What’s more all double taxation treaties signed by Portugal as well as the benefits of EU directives apply.
Conditions for joining the MIBC
If a company wants to benefit from these tax benefits, it must carry out genuine economic activities in Madeira. Additionally, the application of the 5% CIT depends on the creation of jobs or investments in tangible or intangible assets in the first 6 months of operation. If fewer than 6 jobs are created, a minimum capital investment of €75,000 is required. In the case of higher employment numbers, investing capital is not necessary. Depending on the number of jobs created, the tax base to start benefiting from a reduced 5% CIT rate is increased. With one employee (and an investment of 75,000 Euros), the amount subject to the 5% CIT is 2,730,000 Euros. When employing 6 to 30 people, that amount increases to 21,870,000 Euros, and above one hundred it goes up further to 205,500,000 Euros.
When comparing two similar schemes – the Special Economic Zone of the Canary Islands (ZEC) and the Madeira International Business Centre, the latter comes out on top as the more advantageous one.
On top of the minimum level of employment and invested capital (in Tenerife there is also a requirement to employ a minimum of 5 people whilst also investing at least EUR 100,000 in capital), Madeira also comes out first in the breadth of industries to which the scheme is available, i.e. it is practically open to any industry. On the other hand in Tenerife the lower rate of CIT is only available to companies in industries listed in their register. It may be of particular importance to real estate or the beauty companies.
When traveling outside Poland – always remember
General tax rules or basic tax rates do not always determine the attractiveness of a tax system. Sometimes well-organised rebates, and above all their skilled application, creates advantages in less obvious situations. We also feel obliged to constantly remind our clients that when planning to move out of Poland (irrespective of the destination), with or without their business, it is worth consulting experts, mainly due to the complexity in tax systems and frequent changes, as well as sometimes mutually exclusive regulations in markets. Doing that ensures that heading to new destinations, which is already a major change anyway, does not carry further gigantic costs and does not create long-lasting obligations.
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Blog edited by dr Anna Maria Panasiuk
Founder and Managing Partner of Panasiuk & Partners, with many years of expertise in wealth management.
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